Where Does Your Insurance Premium Go?

AHIP, the trade association for health insurers, has a nifty infographic answering the question: “Where does your premium dollar go?”

Obviously designed to defray accusations that health insurers earn too much profit, the infographic shows “net margin: of only three percent. A full 80 percent of our premium dollar goes to paying medical, hospital, and prescription claims.”

Fair enough. However, the elephant in the infographic is the 18 percent of premium that goes to “operating costs.” Lest you think that’s a synonym for “overhead” or “bureaucracy,” AHIP helpfully explains: “Operating costs include consumer-centric activities such as communicating with members, running customer service operations, quality reviews, and data analysis, among other activities.”

Well, readers have to judge how “consumer-centric” those operations are.

In 2015, average premium for a single worker in an employer-based plan was $6,251. So, $1,125 of that contributed to the insurer’s “operating costs.” How much health spending did the average insured person in an employer-based plan incur? $5,141, of which $813 was out of pocket. In other words, insurers’ “operating costs” added 22 percent to actual spending on health care.

Let’s compare this to auto insurance. For a sedan, annual cost of ownership amounts to $8,558 for a sedan, including $1,222 insurance. So, operating costs (excluding insurance premium) are $7,336 – 43 percent more than average annual health spending for someone in an employer-based plan. Yet, the entire premium of auto insurance is less than the operating cost buried in the premium of health insurance!

Another way to look at it: About 25 percent of the premium of auto insurance covers operating costs (see here and here). That would be $305 for a sedan – a mere four percent of the operating costs.

The reason? We do not expect auto insurance to cover almost every penny of spending we incur every year to run our cars. If only that were true of health insurance.

The real issue is not where our health insurance premium dollars go, but how much of our health dollars go to premiums.